On 14 July 2016 the long awaited Reserved Alternative Investment Fund (RAIF) law (“the RAIF Law”) was voted in.
The RAIF is considered by certain practitioners as the ultimate investment vehicle completing the Luxembourg toolbox.
Indeed its flexibility and its lightly regulated aspects seem to be the greatest arguments in attracting the already numerous sponsors (in terms of market shares of fund initiators by country of origin in terms of assets under management, the USA are the main sponsors of Luxembourg investment funds with 20.7%).
It is now clearly a fact that Luxembourg is on the map in the PE/VC world as one of the jurisdictions of predilection. Indeed, the largest PE/VC sponsors are based in Luxembourg (Bridgepoint, Blackrock, CVC, Oaktree, Carlyle, TPG, etc.) and have set up a lot of investment funds. Some of them have decided to locate their European hub in Luxembourg (and more think about it since the Brexit announcement).
Why do the practitioners think that it will be so successful?
An investment fund provides for a lot of benefits but is generally regulated and not specific to certain types of investment policies . In Luxembourg there has been a willingness to build up a dedicated framework for mainstream investment strategies (SICAR for PE/VC, UCITS for retail fund, there is a project to create a REIT regime). All these regimes entailed the acceptance and supervision of the Commission de Surveillance du Secteur Financier (CSSF) (Luxembourg supervisory authority) which gives confidence to the investors and therefore helps the sponsors in terms of capital raising. However this acceptance process might have been seen as a hurdle to the time taken to market a product. Since the AIFMD, the manager’s side is supervised by the CSSF; the question was therefore whether it was useful to have a double layer of regulation (i.e. product and managers). In certain cases it is useful as the investors want to have a fully supervised investment scheme (product and manager) but on other occasions, the supervision layer at the level of the manager grants enough confidence to the investors.
What are the key elements to take away?
A number of elements suggest that it would be a perfect balance between regulation and flexibility for various reasons as explained below.
Supervision: Enhanced time to market
The RAIF Law provides a legal framework which has the benefits of an Alternative Investment Fund, but without falling per se under the supervision of the CSSF, which will therefore reduce the time to market.
At the same time, as an authorised Alternative Investment Fund Manager (AIFM) is being appointed by the RAIF, it will ensure that these types of funds will not be totally un-regulated, which will likely boost the confidence of potential investors.
Known structure: a solid history
A RAIF will be very similar to a Specialized Investment Fund (SIF) and the investment company in risk capital (SICAR) . Indeed, a RAIF keeps the advantages of a SIF/SICAR, notably:
- Creation of compartments
- EU passport for marketing its interest, shares or units
- Full flexibility of legal forms
- No limitation in terms of investment policy (for the SIF)
The SIF law was first introduced in 2007 and has been extremely successful in streamlining the rules around establishing investment fund structures, as well as providing a means to ensure that SIFs are registered.
The SICAR law was enacted in 2004 and until now it was one of the preferred types of investment fund of PE/VC while envisaging to structure an investment vehicle with the purpose of raising capital in the European Union.
However, the RAIF law builds upon the existing legislations to add a new layer of flexibility to that already offered by SIFs/SICARs.
Contrary to SIFs (and provided it does invest in risk capital as per the law, as for the SICARs), RAIFs will not have to comply with the risk diversification requisite. In all other cases, these funds will have to follow the diversification risk obligations (the 30% rule).
Furthermore, by virtue of being indirectly regulated through AIFMs, RAIFs might benefit from the EU passport to market its shares, interests or units throughout the European Union. It is a serious advantage, especially for US sponsors that aim to limit the burdens in terms of marketing their product.
From a tax standpoint, RAIFs will follow the SIF regime and will incur only the subscription tax (taxe d’abonnement) of 1bps (or none, if the alternative investment fund benefits from the exemptions). The SICAR’s tax regime will apply if the RAIF is investing only in risk capital.
Why it should be of interest for the asset managers?
The asset managers have two main concerns, the proper management of their assets and the marketing of their product.
The first one, the lawyer can assist them by putting an adapted framework to develop their management; the rest is what they are good at. The second depends on multiple criteria which include the broadening of scope of the investor’s base in clear, known and efficient schemes.
By setting up a RAIF, the asset manager will benefit from the advantages mentioned above and will open new opportunities to welcome new investors.
Usually, when an asset manager has been successful in the US by the launching of one or several fund(s) they tend to go outside the US and this is where a RAIF is a real solution.
Why should it be of interest for US business lawyers?
The investment management business is becoming more and more international and facilitated by the different media. Therefore, the lawyer advising the asset manager is asked more and more to find new solutions and in certain cases the local solution should be combined with a solution from abroad. That is where the US lawyer relies on their network to find out such solutions and where the RAIF might help him to satisfy the expectations of their clients.
Originally published in American Bar Association PE&VC Committee Newsletter, July 2016